Key facts
- US producer prices rose 5.4% in the 12 months through August.
- Traders now see a 70% chance of a Fed rate hike at the September meeting.
- The Fed has maintained its policy rate between 3.50%-3.75% since December.
- Consumer Price Index data due Friday will further inform the Fed's decision.
- Renewed Middle East hostilities and AI investment are seen as contributing to inflation.
Federal Reserve officials may be slightly more inclined to raise short-term borrowing costs at their upcoming meeting, according to trader sentiment on Thursday, following the release of key inflation data. The Producer Price Index (PPI) for the 12 months through August showed a 5.4% increase, aligning with economists' projections. However, specific details within the PPI report indicated a potential reversal of recent inflation slowdowns, with rising prices for transportation, warehousing, hospital services, and airfares. These increases are partly attributed to renewed Middle East hostilities impacting global oil distribution and surging AI investment driving demand for electronics.
Analysts at Capital Economics noted that the PPI data remains "relatively hot" and suggests the Fed is likely to implement rate hikes this year, though the decision for next week hinges on the more significant Consumer Price Index (CPI) report due Friday. The Fed's target inflation rate is a 2% annual change in the Personal Consumption Expenditures Price Index, which officials can better estimate after reviewing both CPI and PPI figures. Market pricing, based on Fed funds futures contracts traded at CME Group, now reflects approximately a 70% chance of a quarter-point rate hike at the Fed's September 15-16 meeting, up from about 65% before the PPI data. Market expectations also imply at least one, and possibly two, interest-rate hikes by the end of the year.
Earlier on Thursday, the European Central Bank increased its key interest rates to combat inflation, which has been exacerbated by the conflict in the Middle East and pushed Brent oil futures above $100 a barrel.